How should a loan pool be treated?
When you buy or hold a loan pool you are betting that the payoff is great enough to compensate for the risk (loss) of the investment. The risk is characterized by uncertainty surrounding the future performance of each loan in the pool.
There will always be uncertainty in the decision; it is the nature of investing. In the mortgage market, this uncertainty has traditionally been mitigated only through due diligence in loan pools and traditional servicing.
Now, the problems with this traditional method are becoming painfully obvious. The sub-prime meltdown has demonstrated the limitations of the current credit scoring standards in the financial services industry. Current risk management tools are primitive.
In most financial service companies, decisions about risk are made based on outdated guidelines that were developed through trial and error. The few risk models that are commercially available do not provide much help because they are based on relatively ineffective predictors such as FICO or asset valuations. Such variables just scratch the surface of the potential of loan modeling. Additionally, the output from traditional models is usually a single value, with no definition of what it means for risk, outcome probability, or financial loss/gain
Institutions are left asking: How much is this loan worth? What should I do with it? When?
ValueScout provides the answer
ValueScout was an idea born from a group of statisticians and financial service professionals who experienced first hand the limitations of traditional loan valuation methods and the subsequent subprime crisis. An opportunity existed and ValueScout was designed with one intent: To be the best predictive modeling software available for valuing loans
Features
- Valuation of individual loans and loan pool as a whole
- Projected ROI for loan pool purchases at whatever bid rate the user determines
- Confidence intervals on predictions
- Ability to stress the pool by simulating changes in the economic environment
- Likelihood of loans entering some stage of delinquency
- Comparison of default probabilities for loan that is modified vs. unmodified
- Expected NPV from loan modification
Benefits
- Kick out individual loans with high likelihood underperformance; maximize the value pf the loan pool
- Knowledge of what bid rate to propose to maximize value while maintaining competitive bid
- Implementing proactive loss mitigation strategies on high risk loans instead of waiting for payment default
- Setting accurate loss reserves
- Better information for risk mitigation
- Objective criteria for determining whether or not to modify loan
- Knowledge of expected financial impact from modifications on bottom line
